Just in time for the Holidays! My new novel is called BMOC and its now available via Amazon.com. It's a lighthearted mystery that my test readers have found to be engaging and funny. Frequent readers of this site will not be surprised that I turn many stereotypes of modern fiction upside down. A corporate CEO who's actually a good person? You can't do that -- You'll get thrown out of the writers guild!

In one sentence, the novel features a quirky corporate CEO and his summer intern Susan Hunter, who must save their startup company named BMOC from the ravages of tort lawyers, a corrupt Senator, and an out-of-control media while solving the murder of an innocent young girl.

Sounds like a typical day of blogging here at Coyote Blog. Except for the dead girl part. I think folks who like this site will enjoy it.

The City Council here voted late Tuesday to
ban certain giant retail stores, dealing a blow to Wal-Mart's potential
to expand in the nation's eighth-largest city.

The measure, approved on a 5-3 vote, prohibits
stores of more than 90,000 square feet that use 10% of space to sell
groceries and other merchandise that is not subject to sales tax. It
takes aim at Wal-Mart (WMT) Supercenter stores, which average 185,000 square feet and sell groceries....

Supporters of the ban argued that Wal-Mart puts
smaller competitors out of business, pays workers poorly, and
contributes to traffic congestion and pollution. Opponents said the
mega-retailer provides jobs and low prices and that a ban would limit
consumer choice.

Certainly such a ban represents a total disdain for consumers and a populist political stunt to cash in on fashionable Wal-mart bashing. But what is really behind the ban?

A Wal-Mart Super Center differs from a large Wal-Mart mainly in that is sells groceries. And in fact the legislation does not ban all super-large stores, just ones that sell groceries (Wal-Mart could still build a super-honkin large store in San Diego as long as it didn't sell food). Well, this should give us a clue. It tells us that the politicos are not against large stores, just against large new stores that compete with existing grocery stores.

And this puts the lie to supporters statements that their concern is that Wal-Mart "puts smaller competitors out of business." There aren't any "smaller competitors" in California grocery stores, they are all large chains run by corporations. And if there are any local fresh produce shops out there, I don't think their customer base is one to run off to Wal-Mart. This is about protecting grocery retailers from competition. Why? Well, there is one other thing we need to know, and that is that California grocers all have extremely powerful and politically connected unions. This is a story from the LA Times way back in 2003:

Inglewood seemed to offer the perfect home for a new Wal-Mart
Supercenter, with low-income residents hungry for bargains and a mayor
craving the sales-tax revenue that flows from big-box stores.

But nearly two years after deciding to build on a 60-acre lot near
the Hollywood Park racetrack, Wal-Mart is nowhere near pouring
concrete. Instead, the world's biggest company is at war with a
determined opposition, led by organized labor.

"A line has been drawn in the sand," said Donald H. Eiesland,
president of Inglewood Park Cemetery and the head of Partners for
Progress, a local pro-business group. "It's the union against Wal-Mart.
This has nothing to do with Inglewood."

Indeed, similar battles are breaking out across California, and
both sides are digging in hard. Wal-Mart Stores Inc. wants to move into
the grocery business throughout the state by opening 40 Supercenters,
each a 200,000-square-foot behemoth that combines a fully stocked food
market with a discount mega-store "” entirely staffed by non-union
employees. The United Food and Commercial Workers and the Teamsters are
trying to thwart that effort, hoping to save relatively high-paying
union jobs.

The unions have amassed a seven-figure war chest and are calling
in political chits to fight Wal-Mart. The giant retailer is
aggressively countering every move, and some analysts believe that
Wal-Mart's share of grocery sales in the state could eventually reach
20%. The state's first Supercenter is set to open in March in La
Quinta, near Palm Springs....

Yet the Supercenters also threaten the 250,000 members of the UFCW
and Teamsters who work in the supermarket business in California.

For decades, the unions have been a major force in the state
grocery industry and have negotiated generous labor contracts. Wal-Mart
pays its grocery workers an estimated $10 less per hour in wages and
benefits than do the big supermarkets nationwide "” $19 versus $9. As
California grocery chains brace for the competition, their workers face
severe cutbacks in compensation.

"We're going to end up just like the Wal-Mart workers," said Rick
Middleton, a Teamsters official in Carson who eagerly hands out copies
of a paperback called "How Wal-Mart Is Destroying America." "If we
don't as labor officials address this issue now, the future for our
membership is dismal, very dismal."

The push for concessions has already started, prompting the
longest supermarket strike in Southern California's history. About
70,000 grocery workers employed by Albertsons Inc., Kroger Co.'s Ralphs
and Safeway Inc.'s Vons and Pavilions have been walking the picket
lines since Oct. 11, largely to protest proposed reductions in health
benefits. The supermarkets say they need these cuts to hold their own
against Wal-Mart, already the nation's largest grocer.

Rick Icaza, president of one of seven UFCW locals in Southern
California, has taken issue with much of the supermarkets' rhetoric
since the labor dispute began. But he doesn't doubt that Wal-Mart is
the biggest threat ever posed to the grocery chains "” and, in turn, his
own members.

"The No. 1 enemy has still got to be Wal-Mart," he said.

The unions and their community allies have stopped Wal-Mart in
some places and slowed it down in others. They have persuaded officials
in at least a dozen cities and counties to adopt zoning laws to keep
out Supercenters and stores like them.

One of the main salients in the war against free speech is the notion that people somehow have the right not to be offended; in other words, that authorities may legitimately limit speech that gives offense to anyone.

Sparks flew during question period at a Nov. 21 Carleton University
Students' Association (CUSA) council meeting after a motion that would
prevent pro-life groups from assembling on CUSA space was tabled.

The motion -"” moved by Katy McIntyre, CUSA vice-president (student
services), on behalf of the Womyn's Centre -"” would amend the campus
discrimination policy to state that "no CUSA resources, space,
recognition or funding be allocated for anti-choice purposes." ...

According to McIntyre, anti-choice groups are gender-discriminatory and violate CUSA's safe space practices.

The motion focuses on anti-choice groups because they aim to abolish
freedom of choice by criminalizing abortion. McIntyre said this
discriminates against women, and that it violates the Canadian
Constitution by removing a woman's right to "life, liberty and
security" of person....

McIntyre said she received complaints after Lifeline organized an
academic debate on whether or not elective abortion should be made
illegal.

"[These women] were upset the debate was happening on campus in a
space that they thought they were safe and protected, and that
respected their rights and freedoms," said McIntyre....

Julien de Bellefeuille, Student Federation of the University of
Ottawa vice-president (university affairs), said that although his
student association does not currently have any policies regulating
anti-choice groups, he said the motion is a good idea and something
that his school should adopt as well.

Note that the debate is not over whether abortion should be illegal, but whether advocates of abortion bans can even discuss their position publicly. Ms. McIntyre is arguing straight out, with no possibility of confusion of motives, that she thinks that women who believe as she does should be protected from being anywhere in the vicinity of an opponent of her position (presumably she could protect herself without this motion simply by not listening to such speech, so the purpose most be to eliminate opposing speech altogether.

I have a couple of thoughts. First, there is no right not to be offended. Trying to define any such right will be the end of free speech. Second, its funny how the offense is only treated as one-way. While I am OK with abortion, I have many friends who vociferously oppose it. I am positive they are in turn offended by supporters of abortion, but I don't see any motion here to protect them from offense or provide them a "safe zone" free of opposing views. Third, it strikes me that a better word for the "safe zone" she wants is "echo chamber," where like-minded people as her can be free from having to hear any opposing opinion.

Update: The next item in my inbox happened to be on the same topic, and is from FIRE:

A professor at the University of Idaho has asked students to sign a
"statement of understanding" acknowledging that some of the films he
shows may have content that is offensive to some students. Inside Higher Ed brings us the story.

In a university culture where the avoidance of offense is considered a
sacred principle on many campuses, it's not surprising that Professor
Dennis West would hit on a method already commonly used when engaging
in nearly any activity that comes with even a minimal amount of risk.
It's sad that showing films to students can now be considered a risky
activity, but it's not surprising. Episodes like the University of New
Hampshire's reaction to a joking flyer, or Gonzaga's classification of
a flyer as hate speech simply because the flyer contained the word
"hate," make it clear that film professors"”who sometimes show graphic,
violent, or even merely political films"”do indeed have something to
worry about. This is a sad commentary on today's academic culture.

He warned "that immigration to this country is increasing and"¦is making its greatest relative increase from races most alien to the body of the American people and from the lowest and most illiterate classes among those races....half of whom have no occupation and most of whom represent the rudest form of labor," are "people whom
it is very difficult to assimilate and do not promise well for the standard
of civilization in the United States."

[He] complained that many of them "have no money at all. They land in this country without a cent in their pockets." ...He objected that many "stay but a short time in the United States" in order to "then return to their native country with such money
as they have been able to save here." He warned that these sorts of
immigrants, "who come to the United States, reduce the rate of wages
by ruinous competition, and then take their savings out of the country, are not desirable. They are mere birds of passage. They form an element
in the population which regards home as a foreign country, instead of
that in which they live and earn money. They have no interest or stake in the country, and they never become American citizens."

Whoa, who is that? J.D Hayworth? Tom Tancredo? Surely its someone bashing on Mexican immigration -- the mantra is so familiar.

Well, no. Actually, it is Henry Cabot Lodge, in 1891, most likely referring to your grandparents. In these words, he was speaking mainly of Italians, but they are the same charges made against the Irish in the mid-19th century or Eastern Europeans in the early 20th century or, of course, against Mexicans today. Do you really want to stake out the position that yes, this argument was wrong every time it has been used in the last 200 years but it's suddenly right today?

There have been a number of articles of late about college admissions and Asians. For example, my alma mater Princeton is getting sued by a young man who says the school's admissions standards are discriminatory against Asians (he was forced to go to Yale instead, which in my mind represents substantial pain and suffering). David Bernstein at Volokh also had this:

Liming Luo is a high school senior who is both a math prodigy and received a perfect 2,400 score on her SATs. New York Magazine
asked Katherine Cohen, CEO and founder of IvyWise, a school-admissions
consulting company, about her [and other students'] prospects for
admission to MIT, the college of her choice. The answer:

Her perfect SAT score is truly outstanding but not a free ticket.
She is applying to many technical colleges, so she will be competing
against a lot of other high-achieving math/science kids (and a lot of other Asian students in particular). While she may be admitted to MIT early, I am not convinced she's a shoo-in"”I'd want to see more evidence that she's giving back to the community.

I don't know enough to comment on the Asian issues, but I wanted to make a couple of other points. First, Bernstein is probably correct in wondering why there is such a focus on "giving back to the community" for an 18-year old girl who appears to be a math genius. But his question is naive. I can say from experience that everything on an application for college may be negotiable (e.g. good athletics allows for lower SAT scores) except for community service. That has become inviolable. Every college prep school I know have elaborate programs nowadays to make sure their kids get lots of community service hours. My son, at the age of eleven, missed on his first shot at National Junior Honor Society because he only had about 20 hours of community service. I can tell you that for college-bound high school kids, community service is longer about volunteering and giving back but about grimly checking off one of the most important boxes for college applications.

My other thought is that you don't have to be Asian to worry nowadays that near-perfect SAT's and grades are not enough to get one into the Ivy League. As you can see here, placing in the 99th percentile on SAT's only gives one a 1 in 5 shot at getting in to Princeton. The other thing you can see is that top Ivy's are being honest when they say they want more than just good grades -- you can see at Princeton and Harvard that moving from 91st to 99th percentile on SAT's does little to improve a person's prospect of getting in. (On the Asian discrimination issue, that means that more than half of the kids in the top 1 percentile of SAT's will get turned down by Princeton, and some of these will be Asians. Whether that is discrimination or just brutally tough admissions is hard to say).

Which leads me to my main point -- the Ivy League needs to find a way to increase capacity. The number of kids that are "ivy-ready" has exploded over the last decades, but the class sizes at Ivy schools have remained flat. For years I have been campaigning at Princeton for this, and I am happy to see they are increasing the class size, but only by a small amount. Princeton has an endowment larger than the GNP of most countries. To date, it has spent that money both well and poorly. Well, because Princeton is one of just a handful of schools that guarantee that if you get in, they will make sure you can pay for it, and they do it with grants, leaving every student debt free at graduation. Poorly, because they have been overly focused on increasingly what I call the "educational intensity" or the amount of physical plant and equipment and stuff per student. In this latter case, we have got to be near the limit of spending an incremental $10 million to increase the education quality by .01%. We should instead be looking for ways to offer this very high quality of education to more people, since so many more are qualified today.

By the way, one of the reasons Ivy League schools don't take my advice is because of the faculty. The very first thing that the faculty wants is more endowed chairs, more equipment, more office space, etc. The very last thing most faculty wants is more students that would force them to actually teach more rather than publish and do research.

Postscript: OK, I will make one comment about the Asian kids thing. I don't know if what Ivy admissions offices are doing is discriminatory or not. But I do know that among the white parents of college-bound high school students that I know, there is real undercurrent of anti-Asian resentment. I can't tell you how often I hear stuff like "Oh of course he does well, he's Asian" or "I don't know if my kid can get into X, all the Asian kids get the spots." Its a strange, resentful sort of racism I see all the time from parents who would never be caught dead uttering anything untoward about blacks. There is this funny feeling I get in some of these conversations that it's OK to dislike Asians in a way that would never be perceived as OK for blacks.

Under both state and federal law, it is illegal for me to hire anyone without documenting that they are in fact a legal US resident and have the right to work in the US. Those of you who read this blog know that this irritates me, given my support for open immigration, but I do it. It is also illegal for me not to make all the relevant state and federal social security and income tax withholdings for each employee, as well as pay premiums into state and federal unemployment funds, all of which require that I have an accurate social security number from each employee. No valid social security number, no job.

All this mess is hard enough to comply with, and it takes a lot of my managers time, a full-time HR person, and thousands of dollars sent to ADP to stay legal.

A Mississippi Democrat in line to become chairman of the House Homeland
Security Committee has warned the nation's largest uniform supplier it
faces criminal charges if it follows a White House proposal to recheck
workers with mismatched Social Security numbers and fire those who
cannot resolve the discrepancy in 60 days.

Rep. Bennie Thompson said in a letter to Cintas Corp. it could be
charged with "illegal activities in violation of state and federal law"
if any of its 32,000 employees are terminated because they gave
incorrect Social Security numbers to be hired.

Great. Now I can go to jail both for employing folks without a valid social security number and for not employing folks without a valid social security number.

Unemployment insurance is a disaster for a seasonal business like mine. As background, most of my employees are retired, and don't really need to work. They work for me in the summer, and then frequently take the winter off. Unfortunately, some of the more unscrupulous ones will file for unemployment over the winter, telling the state office they are looking for work (usually a requirement) when in fact they have no intention of working. I had two employees last year for whom I received a notice of their unemployment filing the very same day they called me to tell me what a great time they are having over the winter fishing in Mexico.

For those who don't know how it works, if I get a lot of unemployment claims I am punished with a higher rate the next year, despite the fact that by the nature of the business I have absolutely no work I can offer people in the winter. Not surprisingly, I guess, my worst problems with such behavior are in the three Pacific coast states (CA, OR, WA) where the prevalent culture of big government benefits and limited individual responsibility combine to make people feel totally OK about such malfeasance (this behavior is 20 times more prevalent for me in these three states vs. the other ten we operate in). In fact, I have challenged several people who I knew were not looking for work and cheating me and the unemployment system and, rather than deny the charges, they threatened me with a lawsuit if I either reported them to the state or disciplined them in any way.

I'm not really going anywhere with this -- this is just my annual rant I post every year when I get my unemployment insurance rates for CA and OR. I pay over 6% of wages as premiums in CA, and there is not a thing I can do about the fact that all the facilities we run are under 10-20 feet of snow in the winter and don't need employees.

I have long suspected, but can't prove, that most of the recycling we do is worthless. I look in my recycling bin and think -- it's got to be cheaper to start with the raw material than what's in this bin. The problem is hidden system costs. For example, everyone thinks they are saving energy by recycling. But in my town, as in most towns, recycling basically doubles the vehicle miles driven by the sanitation trucks to get all the waste out, because we get a visit from the "trash" truck and later in the week get a visit from the "recycling" truck. Plus there is all that extra labor in the pickup and the sorting. And that is all before the processing costs. And all this is without even considering the staggering amount of "free" labor the recycling system gets from you and I as individuals.**

The Mises Blog has a link to the online video of a Penn & Teller Bullshit! show that takes on this very issue. Since its Penn & Teller, its both funny and smart, and comes to the conclusion that only aluminum can recycling really makes sense. All the rest is a big feel-good circle jerk that really saves no money or energy. Its particularly funny when they put about 15 different colored cans in front of one guys home and tells him each is for a different type of material. The one addition I would make is that reusing an object for its original use almost always saves money -- for example, we save Amazon boxes to use when we ship things out.

Along the same lines of hidden costs, this study sent to me by a reader looks at the total lifetime energy costs of automobiles, including their manufacturing and transportation as well as their fuel use. I can't vouch for it's accuracy, but the results are somewhat surprising -- for example, most hybrids have lifetime energy costs higher than average for vehicles.

** But recycling is easy! It hardly takes any time! Well, let's say it takes only an incremental 1 minute a week from each individual in the country to recycle (a number that is lower than the actual, I think). That translates to 260 million man-hours a year or the equivalent of 130,000 full time jobs.

For some reason, probably because no one there has actually read my blog, the Minutemen Project has me on their email list for press releases. This one caught my eye:

Judge John H. Wilson has stepped out of his judicial robes to write a children's book. Hot House Flowers is aimed at entertaining and educating children, but adults will find the story an informative and useful object lesson in politics and current events and a cautionary tale to share with family and friends.

Judge Wilson tackles the topic of illegal immigration in an imaginative manner, and the publisher adds a colorful assortment of illustrations to the Judge's metaphorical story of cartoon "hothouse flowers" which must resist the intrusion of weeds from outside the borders of the protected house.

On first reading this, I wanted to barf. Comparing immigrants to weeds that attack us lovely (Caucasian) flowers is really insulting. However, on second thought, I thought this analogy was somewhat apt.

A hothouse flower is one that can't compete or survive outside of the limited confines of its greenhouse. Rather than being able to survive on its own, a hothouse flower takes a ton of outside care and feeding. The very term "hothouse flower" when applied to a person tends to mean someone who can't really function in the real world. And in some sense this is what our citizens and businesses will become in a Lou-Dobbsian world of limited immigration and trade protectionism, each of us hot house flowers or Marie Antoinette's who have no ability to function in the larger world. We all need healthy interchange and competition with the world at large to stay vital and growing as a country and as individuals.

"Over the past 15 years, immigrants have started 25 percent
of U.S. public companies that were venture-backed." These businesses
employ some 220,000 people in the U.S. and have a current market
capitalization that "exceeds $500 billion, adding significant value to
the American economy."

All your bsae are belong to us. (Explanation of pop culture reference here)

From Yahoo news. Cindy Sheehan gets the award this week for being a worse speller than I am. By the way, I believe the issue at hand is actually a base relocation rather than an expansion, but I may be behind on the story.

Did I want to sign up for the largesse, it inquired. It politely
offered me the option of declining, saying, "IF YOU DO NOT WISH TO BE
INCLUDED IN THE CLASS AND YOU DO NOT WISH TO PARTICIPATE IN THE
PROPOSED SETTLEMENT DESCRIBED IN THIS NOTICE, YOU MAY REQUEST TO BE
EXCLUDED." (The capitalization is theirs. I am not usually that
annoying.) Well, THANK GOD, I said. I can opt out of a lawsuit that was
filed in my name without my approval if I should have, well, you know,
scruples.

Except, as lawyers like to say, don't neglect to
read the next sentence. And the next, and the next, and the next, and
the next. Somewhere in there is the gotcha. "TO DO SO, YOU MUST SUBMIT
A WRITTEN REQUEST FOR EXCLUSION THAT MUST BE RECEIVED ON OR BEFORE
OCTOBER 31, 2006."

All right, now. I got the letter on
November 13, 2006. Admittedly the U.S. Post Office is slow, but I'll
give them credit for getting a letter from the West Coast to
Mississippi in less than 14 days. Unfortunately, the letter was mass
mailed and thus bypassed the local post office. It bore no postmark. In
other words, I got the letter two weeks too late to opt out of the
lawsuit, and I had no postmark to prove it was intentionally mailed out
late to prevent me from refusing to participate. The old expiration
date trick. That was slick, Mssrs. Lerach, Coughlin, Stoia, Geller,
Rudman, Robbins, Levin, Papantonio, Thomas, Mitchell, Echsner, &
Proctor -- real slick.

He is even more non-plussed to learn that he is in line for a check for $0.90, while the lawyers are in for $23.9 million. I feel his pain. I, for example, have been informed on several occasions that Visa and Mastercard, among others, are being sued in my name, though I never engaged anyone to do so.

Among the alleged abuses were
bills of $195 an hour for work by paralegals who were paid just $30,
claims that attorneys and paralegals worked 24-hour or even 72-hour
days, and charges of $90 an hour or more for cleaning desks and
filing....

According
to records filed with the federal court, individuals at one legal group
representing the class, the Law Offices of John Burris in Oakland,
billed as much as 72 hours in a single day for document review and, in
dozens of instances, billed for 24-hour days.

Of course the attorneys had a strong rebuttal to these revelations:

The lawyers accused of overstating their hours and expenses responded
by strenuously objecting to Judge Armstrong about the public disclosure
of their billing records, which the attorneys said were confidential.

Sorry posting has been light this week. A reader was nice enough to point to the latest rant by Lou Dobbs here. Apparently, he has decided to take the position that free traders are now elitists, while folks like him who want the government to pick and choose winners among American businesses and industries as "populist." The obvious response of course is that beneficiaries of American protectionist legislation tend to read as the who's who of politically connected elitists. It is also hilarious to equate free trade, whose benefits are backed by 100 out of 100 economists, with some irrational faith-based belief system. But I will leave that aside to point to this line:

He and others completely disregard the $5 trillion in trade debt that
the United States has built up through 30 consecutive years of trade
deficits. That trade debt is rising faster than our national debt and
is simply economically unsustainable, no matter what any faith-based
economist would argue. Our political, business and media elites
continue to disregard reality.

Here is my very, very simple challenge for Lou Dobbs to help those of us who obviously don't get it: Point to where this $5 Trillion of Debt is. What private individuals or corporations owe it to whom? That should be simple. With the national debt, we can just go out and count all those government bonds. But where is this trade "debt"?

Answer: IT DOESN'T EXIST. What he means is that over some time span of several decades, American has a cumulative trade deficit of $5 trillion. But trade deficit does not mean debt. I showed this in great detail here. Calling it a "trade debt" is not a sloppy mistake on Dobbs part but an outright lie, meant to make the point that running deficits every year is unsustainable. But America has become the wealthiest country in the world running trade deficits for the majority of the last 100 years. In fact, one can argue that the trade deficit itself only exists as a phantom of the awkward and limited way in which we measure trade. Postscript: I constantly get people who write me that the fact the Chinese are buying up a lot of US government bonds or corporate bonds with their trade profits is proof of a "trade debt." No such thing. The US Government bonds are evidence of a fiscal deficit of the federal government, also called the national debt, and exists not because of trade but because Congress has no fiscal discipline. Corporate debt is growing to buy back stock, make corporate acquisitions, and to buy new plants and facilities. The fact the Chinese help to fund these debts does not mean that trade caused this debt. In fact, foreigners buying US debt securities depresses interest rates and actually keeps the national debt lower.

Here is a thought experiment: Wal-Mart runs a multi-billion dollar trade deficit every year with China. Why isn't it building up lot's of debt to the Chinese?

Kevin at Truck and Barter has a great article where he fact checks a statistic he found in a "non-fiction" book. And what do you know, it was not only wrong, but way off. And, to make matters worse, changing the statistic to its correct value undermines much of the premise of the book:

What an utter refusal to check sources and validate simple statistics!
THIS IS NOT MY JOB, nor the job of any of Ms. Robbins' readers. It's
the job of the author and editors. I don't know if I should even bother
continuing to read the book at all, as I've spent 1/2 hour tracking
down just one horrendously wrong data point. How many more will be this
wrong???

My hypothesis is that this happens all the time, especially in media reports about various social ills. We have all suspected that if you add up all the people in articles that suffer from X or Y, it would include everyone in the country, probably three times over. Part of this is the very poor scientific and statistical background of most writers and editors. However, I think it also is a problem of skepticism. Editors and reporters don't necessarily have the time to fact-check everything, so they do a kind of triage using their own personal skepticism as a guide. And I think most reporters and editors are more than willing to believe that nearly every social ill discussed -- homelessness, teen suicide, drug abuse, hunger, etc. etc. -- are prevalent and getting worse, so they seldom really push back on relevant numbers for these issues. Most publishers and media outlets have pushed hard for diversity of skin color, but these groups remain pretty uniform in their outlook and basic assumptions about society, and so their failures of skepticism are pretty predictable.

Milton Friedman kept alive both the economic and philosophical basis for free markets and classical liberalism through the 60's and 70's when few others stood willing to carry the torch. Like only a handful of other economists, he successfully went beyond pure economics to champion the link between economic liberty and all other freedoms. But he was perhaps unique in taking this perspective to the masses, in ways that connected with the average person. He will be missed. In tribute, I guess I need to go out and pay for lunch today.

Update:Tom Kirkendall, one of the best bloggers you may have never read, has a great roundup of Friedman quotes. Also, Alex Tabarrok reminds us of this great Friedman quote:

President Kennedy said, "Ask not what your country can do for you - ask
what you can do for your country."... Neither half of that statement
expresses a relation between the citizen and his government that is
worthy of the ideals of a free society.

I have been thinking about this previous post on trade and wanted to improve my answer to Jon Talton, our free-markets-hating business columnist in the Arizona Republic. In his recent column advocating that we finally give up on all this free trade stuff, he said:

Americans were assured that new trade accords and China's membership in
the World Trade Organization would mean better living standards for
American workers. That's because China and other countries supposedly
would buy American exports.

I thought my answer was OK, but I want to take another shot at it, because I hear the argument all the time that "trade only benefits the US if other countries buy our exports." This is wrong, but this misconception drives many people's thinking on trade.

If we are importing more from other countries but they are not "buying more of our exports," such that we have a large trade deficit, there are two possibilities to explain this:

The definition of exports is too narrow

Someone is throwing away value by building up a big pile of US dollars

The first is the most likely explanation. A dollar is valueless in China, and the UK, and France except to the extent someone thinks they can eventually use it to buy something in the US. Dollars that aren't or can't be used to buy dollar-denominated assets of some sort have no value. The money a Chinese exporter accepts from Wal-mart is only valuable if they can recycle it and buy something in the US with it (or trade the dollars to someone else in China who wants to buy something in the US).

So the dollars we send overseas for imports are going to come back. But the reason our trade accounts are out of balance is that the trade deficit numbers they quote on TV define our exports narrowly. In short, "exports" as commonly measured don't include all the things we sell to foreigners for dollars.

One example of this is if a Chinese company takes the $10 million dollars it earns from exporting to the US and then invests $10 million in US materials to build a factory in the US. That sounds OK, right? That seems to be in balance. But in the way we calculate the trade deficit, that would show as a $10 million trade deficit, because goods (and services) that foreigners buy in the US and consume in the US (rather than back in their home countries) are not considered an "export." In fact, I would consider this "better" than an export, since both the dollars and the goods stay in the US. But to trade deficit hawks, this is worse, mainly because their measurement is flawed.

A second example is if a Chinese company take the $10 million dollars it earns from exporting to the US and invests the money in US mortgage bonds. Again, this would show as a trade deficit, but the US economy benefits from lower interest rates. In this case, we are again selling foreigners a product, in this case wealth protection, which the US is very good at since we have a more stable economy and stronger rule of law than any other country in the world. And again, the way we measure "export" does not encompass this product, since our trade measurement has a strong manufacturing bias that does not match the more diverse nature of our economy today. (For those that lament forefingers helping to fund the enormous government debt, I share your pain, but that is a government spending problem and not a trade problem).

But what if the foreigners are totally perverse. What if they ignore their own best interests and refuse to buy our exports and just sit on the dollars they get from trade without recycling them in any way to the US? What if they do this even if by doing so, they would be throwing away billions, even trillions of dollars in value? As absurd as this sounds, this is exactly the concern Talton and other trade-skeptics raise.

Well, the US in this case would STILL be better off. First, the US would be getting whatever goods we are buying overseas cheaper or better (or else people would not be buying them). This would reduce the costs of inputs to other products, and increase money consumers have to spend on other things. The labor that would have gone into making these products domestically would be redeployed to making other things, increasing our net wealth.

By the way, it is this last sentence I think Talton and his peers would not accept. They tend to view employment as zero-sum, ie there are a fixed number of jobs in the world, and if we import, that creates jobs overseas which must reduce jobs in the US. But labor markets have never worked that way. As I wrote before:

I have taken on this zero-sum mentality before,
but it is particularly wrong-headed in this case. Historically, the
argument makes no sense. For example, the automation of the farm
sector wiped out 80 or 90% of the farm jobs in the US over the last
century. By the zero-summers logic, we should be impoverished.
Instead, these people were redeployed to manufacturing and service jobs
that create far more wealth than the old 19th century farm employment.
But while people can sort of accept this historically, they can never
accept this in real-time. But the fact is that when we lose, say, a
textile job to foreign competition, we not only gain because everyone
pays less for textiles and thus has more money to spend on other
things, but that worker gets redeployed over time to higher-value
functions. Look at the old textile belt in North Carolina - what's
there now? Electronics and Bio-tech.

By the way, the other thing that would occur if foreigners just buried dollars in the sand without recycling them is that the value of the dollar would rise to levels higher than it would be at if these countries recycled their dollars, thus further lowering the price of inputs for the US. Talton laments this very effect:

Now, the populists will get a chance to make their arguments,
especially over what the American response should be to Chinese
currency manipulation, tariffs and subsidized exports.

The currency manipulation and subsidized exports have one thing in common: They are both ways that the Chinese destroy value for their own citizens in order to lower prices for American consumers. And Talton claims that the populist argument should be to end these practices? Why? I think its great that the Chinese want to hold billions in dollars just to keep the dollar high and prices low in the US. I think its great that their taxpayers want to subsidize lower prices in the US. I can understand why a Chinese citizen might want this to stop, but why should we, who are the beneficiaries?

Update: By the way, another common misconception is that a trade deficit implies someone is building up a debt. This is not (not not not) at all true. We can run a trade deficit indefinitely without building up a debt. Yes, foreigners are currently investing some of their trade profits in US government bonds necessitated by the federal government's deficit spending, but the two are only weakly related - a trade deficit does not cause government debt. A great way to see if a columnist has any idea what they are talking about is to see if they confuse the federal budget deficit with the trade deficit. It is almost funny how often I see this confusion appears in print. Anyway, this confusion is why people like Talton call the trade deficit "unsustainable". See my posts on why the trade deficit is not a debt (and here).

Am I the only one who gets ethical qualms about frequent flier programs? If your job was to buy supplies for the company you work for, and a printer company offered to give you and your family a Hawaiian vacation if only you would have your company buy their printers instead of the competition's, could we all agree that would be a kickback or bribe? And that it would be, if not illegal, certainly unethical?

So why don't the same rules apply to airline travel? When buying an airline flight for business, you are acting as a purchasing agent for your company. And the airlines, in the form of frequent flier miles, are offering you [not the company] something of value to steer your corporate purchasing decisions to their product. Frequent flier miles are a blatant kickback. Informal poll: How many of you have purchased flights that are a worse deal for your company but a better deal for your frequent flier account?

A further rant: OK, if you are not turned off by that rant, here is a related one about Visa cards that give out frequent flier miles. As mentioned earlier, these are hugely profitable for credit card companies, so much so that they create much of the value in modern airlines. Credit card companies, perhaps the only stable monopoly I have seen in my lifetime, have perfected the art of forcing retailers to subsidize their credit card users.

Now, a fairly rational person would expect that a cash transaction is cheaper than doing one on credit. However, due to the very strong position of MC and Visa processors, credit card customers actually get a lower price than cash customers. Here is why: Credit card companies have taken to giving their users a rebate on their purchases, either in cash or frequent flier miles or some other compensation. These rebates are funded by charging higher interchange fees to merchants (basically a percentage of credit card transactions cleared). The magic occurs because merchants, in their processing agreements, are generally banned from giving discounts to customers for using cash. As a result, the higher credit card interchange fees are spread among all customers, cash or credit card, equally. The result is that credit card customers pay lower net prices than cash customers, when the rebates are factored in.

Though our trade association tries to seek government action of some sort, I am neither confident that this will help or philosophically inclined to ask for such help. Right now, I am working within the association to try to build support for some sort of one day boycott against accepting credit cards as a starting point to trying to build up some group negotiating power vs. the credit card processors.

Apparently, USAirways (the recently merged product of America West and US Air) has made a bid for buying Delta out of bankruptcy. The bid is around $4 billion in cash and $4 billion in USAirways stock. Which got me thinking about airline mergers in general.

Companies can be thought of as having tangible assets (trucks, airplanes, factories) and intangible assets (reputation, employees, brand names, contracts). Most companies are worth far more than the book value of their tangible assets. Most of Microsoft's value, for example, is in it's products, its brand, its franchise, its contracts, its people, etc., not in hardware or buildings. As a result, most acquisitions are completed at prices far above the book value of the assets of the purchased company. The difference is called "goodwill" by accountants and "enterprise value" by economists.

But enterprise value is a problem in airline mergers. Most investors expect to pay and get paid a premium over asset values in a merger. But I am not sure there should be any such premium nowadays for airlines, because I fear that the typical airline's "goodwill", or the value of their intangible assets, may be negative.

Take the example of Delta. Unlike scrappy competitors like Southwest and JetBlue, Delta has a lot of baggage (so to speak). First and foremost, they have terrible legacy union contracts that mean that pay all of their employees much more money than do startup airlines and they are much more constrained by work rules in improving productivity. They have huge and building under-funded retirement and medical accounts. They have legacy contracts that may suck, and they often have hodge-podge mixed fleets that are hard to maintain. All of this tends to add up to a negative effect on value.

The one positive intangible companies like Delta have is their brand value, and I would argue that most of that is tied up in their frequent flier programs[** Update Below]. Without these programs, most frequent fliers have demonstrated that they would switch airlines for trivial improvements in fares. This value in the frequent flier programs was demonstrated in the America West merger (among others), when Juniper Bank contributed $455 million (!) to the merger for the right to issue the visa card attached to the program. Wow.

Given this problem of negative enterprise value, it is not surprising that savvy upstarts like JetBlue and Southwest before it have not grown by acquiring other companies. Both are willing to take advantage of bankrupt competitors to grow, but they only have bought assets (like planes and gates) rather than whole enterprises, so they don't inherit legacy contract or union issues. When the companies who are making money do things one way, and the companies who find themselves in bankruptcy court every five years do it another way, the difference probably matters.

Which brings me to the title of the post and agency costs. It is really, really uncertain whether buying Delta is good for the USAirways shareholders. Since buying airline equities has always been a losing proposition over the long haul, the deal only makes sense if 1) They are getting a screaming deal, either because of Delta's bankruptcy or because they are doing the deal in just the right part of the business cycle; or 2) They can really harvest synergies, which in this case would have to include shutting down entire hubs, such as Charlotte in favor of Atlanta or Cincinnati in favor of Pittsburgh. While I can't speak to the latter with any facts, you have a better chance betting Arizona will win the Superbowl than betting any acquisition hits its promised synergy values.

But if the value of the acquisition is unclear for shareholders, there is one group that almost certainly benefits: USAirways management. Management, even if shareholders don't get a great deal, will benefit in both monetary and non-monetary (e.g. status) ways from running an airline three or four times as large as the current enterprise. This mis-match in incentives between hired management and shareholders is called agency costs, and is something every board should be more cognizant of when approving acquisitions.

The Democrats are in the process of making some really silly choices for their leadership positions, so the Republicans take the opportunity to grab the moral high ground by... bringing Trent Lott back into the leadership? Huh? Other than being perhaps a convoluted FU to John Conyers, who has been dissing Mississippi, what sense does this make? I thought Jeff Flake made a convincing argument on 60-Minutes that the Republicans had blown their own foot off in this last election. It seems that rather than putting down the gun, they are just raising their aim.

I don't know where I got the link from, but this is the best comment I have seen on the whole Trent Lott election, from Dean Barnett:

If
there's one message that the electorate sent the Republican Party last
week, it's that we hadn't given them enough of Trent Lott. I cannot
adequately express my delight that Senate Republicans have moved with
such expediency to right this egregious wrong.

Well, probably not. But Seattle voters did take the great step of banning public subsidies for pro sports teams, which usually take the form of sweetheart stadium deals. Of course, this being Seattle, the proposition's promoters were motivated less by libertarianism than by the desire to spend more government money on other things. But since public funding of stadium's is a personal pet peeve, I will give them one cheer.

To see this clearer, lets take the example of Major League Baseball
(MLB). We all know that cities and states have been massively
subsidizing new baseball stadiums for billionaire team owners. Lets
for a minute say this never happened - that somehow, the mayors of the
50 largest cities got together in 1960 and made a no-stadium-subsidy
pledge. First, would MLB still exist? Sure! Teams like the Giants
have proven that baseball can work financially in a private park, and
baseball thrived for years with private parks. OK, would baseball be
in the same cities? Well, without subsidies, baseball would be in the
largest cities, like New York and LA and Chicago, which is exactly
where they are now. The odd city here or there might be different,
e.g. Tampa Bay might never have gotten a team, but that would in
retrospect have been a good thing.

The net effect in baseball is the same as it is in every other
industry: Relocation subsidies, when everyone is playing the game, do
nothing to substantially affect the location of jobs and businesses,
but rather just transfer taxpayer money to business owners and workers.

"These very simple guidelines, You can rely upon: You're gouging on your
prices if You charge more than the rest. But it's unfair competition if

You think you can charge less! "A second point that we would make To
help avoid confusion... Don't try to charge the same amount, That would
be Collusion! You must compete. But not too much, For if you do you see,

Gasoline retailers can't win. One day, they're
accused of "gouging" us at the pump with outrageously high prices; the
next, they're accused of "predatory pricing," which means giving us a
deal so good it's illegal....

The effect of the $1.4 million jury verdict against Dillon Co.
means that two of its grocery chains, King Soopers and City Market,
will no longer give customers gas discounts based on grocery purchases.

Safeway wasn't a defendant but it got the message and likewise
suspended its discount program at 43 of its fuel centers. Discounts
sponsored by other supermarket or big-box chains are also expected to
end.

The lawsuit was based on Colorado's 69-year-old "Unfair
Practices Act," which prohibits selling a product "below cost." The law
is supposed to be enforced by the attorney general's office, but the AG
hasn't brought an action for years because of the near impossibility of
proving that gas sales are below cost when so many grocery products are
also involved.

But the law also permits private civil suits in which winning
plaintiffs are entitled to treble damages. The plaintiffs here were a
couple of independent gasoline dealers in Montrose spurred on by a
trade group representing the state's independent petroleum marketers....

By the way, seldom do you find a newspaper that actually understands economics when writing about an economics topic, but the Rocky Mountain News is dead on here:

The theory behind predatory pricing laws is that a large
company will sell certain products below cost in order to drive out
competitors. Once the competitors are gone, goes the hypothesis, the
big company will jack up prices to a monopoly level.

The only problem is, this never happens. New competitors always
move fast into markets where prices are unjustifiably high.
Predatory-pricing suits are generally filed by existing companies
unable or unwilling to meet competition provided by more efficient
firms. Legal restrictions on cutting prices invariably work against the
consumer.

It was a stunning weekend here in Phoenix. Spent most of it at kid's sporting events, but got a chance to go to the Phoenix zoo and finally visit our new orangutan baby. Got some great pictures with my Nikon D50, including this one that really came out great:

Don Boudreaux has a great response to the growing tide of protectionism, as espoused and defended by Harold Meyerson:

Harold
Meyerson repeats the canard that "globalization entails [a] downward
leveling" of economic well-being ("Tipping Point for Trade," November
11).

This belief is crushed by mountains of evidence. It's
crushed also by its own illogic: if ordinary people are served by being
"protected" from globalization, then they can be made even better off
by being protected from countryization - and better off still by being
protected from townization and neighborhoodization. Protectionist
quackery implies that we achieve maximum prosperity when no one
consumes anything produced by anyone else.

ANN ALTHOUSE IS DEPRESSED:
"It's the failure of Americans to support the war. It's the folding and
crumpling because things didn't go well enough and the way we
conspicuously displayed that to our enemies. They're going to use that
information. For how long? Forever."

Despite my initial opposition to the war in Iraq, once we were there I have always been a stay the course guy. Partially for the reason that Althouse mentions, the damage to our credibility, and partially just because we have made a commitment to the Iraqi people and it would be dishonorable to leave them in the current mess without help.

What Althouse misses is this: American's are not necessarily ready to give up on the war in Iraq, but they are ready to give up on the Administration's management of it. One definition of insanity is doing the same thing over and over again and expecting different results. This is how many folks, including myself, see our effort in Iraq. We beat our head over and over against the same wall in the same place, expecting different results, and we don't get them. People need to see an acknowledgment that the current approach is not working, so we are going to try X instead.

In this context, "stay the course" looks less attractive. Because no one can seem to communicate what the extra time is going to buy us. What will be done in three more years that was not done in the last three? Or will we have to support the Iraqi's for decades against their own desire to tear themselves apart, so twenty years from now we can say "well, it took all our capacity and the military got nothing else done, but we finally converted one bad regime out of about fifty out there to a democracy."

I am willing to give the administration one more shot to define success in Iraq and a plan for getting there. Right now, many Americans feel like the only two choices are "retreat now, with Iraq still a mess" and "retreat in five years, with Iraq still a mess and after a lot more casualties." The administration is going to have to define an option 3 to get people back on board.

I was wondering this morning if I could turn public opinion against penicillin. After all, hundreds of people die every year from taking penicillin. If I ran a newspaper, every day I could feature another heart-rending story about a small child or a single mother with four kids dieing from a penicillin allergy. Sure, some heartless fools who don't understand these poor people's suffering will say that penicillin is a net benefit. But that will be easy to counter - I'd ask them to show me who was saved. Sure, lots of people take it, but how can you prove they would have been worse off without it? How can you prove how many people would have died without it? I would have an easy time, because the victims of penicillin are specific and very visible, and the beneficiaries are dispersed.

I thought of this analogy while I was reading Jon Talton's column on the front page of the Arizona Republic business section celebrating the Democratic victory in Congress because we may finally be able to get rid of this awful free trade stuff. As an aside, Talton has always been an interesting choice as the primary business columnist int he Republic, given that he doesn't really feel bound by the teachings of economics and he really does not like business. His socialist-progressive formulations may be appropriate somewhere in the paper, but seem an odd choice for lead business columnist, sort of like finding a fundamentalist evolution denier, who still accepts Archbishop Usher's age of the earth, as lead science columnist.

I would fisk Talton's column in depth, but he doesn't really say anything except throwing together a hodge-podge of progressive rants against globalization (CEO pay, China, decimation of manufacturing -- he's got everything in there). Like most progressives, he extrapolates flatness (not even declines, but flatness!) from 2001-2004 and declares that the world economy has changed and he has seen a major macro-economic trend (no mention of how the business cycle and recession we had in the same period might have affected things).

I will just take on one piece, where he says:

Americans were assured that new trade accords and China's membership in
the World Trade Organization would mean better living standards for
American workers. That's because China and other countries supposedly
would buy American exports.

Economists, what grade does Mr. Talton get? F! Because he demonstrates that he does not understand the economic argument for trade. Because the argument does not actually require that foreign countries buy our exports for us to be better off with trade. Comparative advantage says that even imports alone help our economy, allowing us to purchase inputs more inexpensively and refocus our domestic labor on tasks which we do comparatively better.

The second fallacy with his statement is that export numbers grossly understate the amount of goods and services that foreigners buy from us. Exports are only the goods they buy from us and take back to their country. But foreigners buy many goods from us and use them in the US (say to build a factory or as an investment or financial instrument) and these foreign purchases of American goods don't show up as exports. As long as the US is the safest and most stable country in the world, we will probably always run a trade deficit, as foreigners will continue to want to keep the goods and financial instruments they buy from us in the US where these assets are safer. I wrote a lot more about this topic, and the recycling of dollars from China, here.

Finally, implicit in this anti-globalization view of trade is an assumption that the economy is zero-sum -- ie, there is sort of a global fixed pool of jobs, and if China gains steel market share and employment, the US net loses employment. I have taken on this zero-sum mentality before, but it is particularly wrong-headed in this case. Historically, the argument makes no sense. For example, the automation of the farm sector wiped out 80 or 90% of the farm jobs in the US over the last century. By the zero-summers logic, we should be impoverished. Instead, these people were redeployed to manufacturing and service jobs that create far more wealth than the old 19th century farm employment. But while people can sort of accept this historically, they can never accept this in real-time. But the fact is that when we lose, say, a textile job to foreign competition, we not only gain because everyone pays less for textiles and thus has more money to spend on other things, but that worker gets redeployed over time to higher-value functions. Look at the old textile belt in North Carolina - what's there now? Electronics and Bio-tech.

The problem with trade is very like the one in the penicillin analogy -- it is all-to-easy to identify the few short term losers, who lost their job in American industries that can't compete with foreigners, but all-too-hard to find the huge dispersed benefits from lower prices and the continuing creative destruction that comes with strong competition. This doesn't mean that individuals lives aren't disrupted, but it does mean that it's short-sighted to the point of being a Neanderthal to use these disruptions as an excuse to throttle free trade, just as it would be short-sided to ban penicillin because some people have allergic reactions.

It will be interesting to see if the Lou Dobbs populists rule the day on this issue. If so, they it will be ironic that it is the Democrats, not the Republicans, who take the first major steps to dismantling the work of Bill Clinton (because it sure as heck hasn't been GWB supporting free trade).

It is important to note that each and every one of these
government interventions subsidizes US citizens and consumers at the
expense of Chinese citizens and consumers. A low yuan makes Chinese
products cheap for Americans but makes imports relatively dear for
Chinese. So-called "dumping" represents an even clearer direct subsidy
of American consumers over their Chinese counterparts. And limiting
foreign exchange re-investments to low-yield government bonds has acted
as a direct subsidy of American taxpayers and the American government,
saddling China with extraordinarily low yields on our nearly $1
trillion in foreign exchange. Every single step China takes to
promote exports is in effect a subsidy of American consumers by Chinese
citizens.

This policy of raping the domestic market in pursuit of exports
and trade surpluses was one that Japan followed in the seventies and
eighties. It sacrificed its own consumers, protecting local producers
in the domestic market while subsidizing exports. Japanese consumers
had to live with some of the highest prices in the world, so that
Americans could get some of the lowest prices on those same goods.
Japanese customers endured limited product choices and a horrendously
outdated retail sector that were all protected by government
regulation, all in the name of creating trade surpluses. And surpluses
they did create. Japan achieved massive trade surpluses with the US,
and built the largest accumulation of foreign exchange (mostly dollars)
in the world. And what did this get them? Fifteen years of recession,
from which the country is only now emerging, while the US economy
happily continued to grow and create wealth in astonishing proportions,
seemingly unaware that is was supposed to have been "defeated" by Japan.

There is nothing I think is dumber than the standard post-election plea for bipartisanship you see in newspapers after every election. This election is no exception. Get over it. The Democrats won, they have been out of power for a while, and have a backlog of stuff they want to do. I won't agree with a lot of it, which will put me in the same place I was with the Republican Congress. I'm going to be pissed when the Democrats try to increase the minimum wage, roll back NAFTA, impose oil windfall profits taxes and raise income taxes. Just as I was pissed when the Republicans passed McCain-Feingold, the prescription drug boondoggle, steel tariffs, and gave up on social security reform and any meaningful ethics and earmark reform.

That's nonsense. In a closely divided legislature, partisanship and
attacks on the other team are the logical course for both parties.
Because both parties know that either House or Senate could easily
switch back over in 2008, they will do their best to deny the other
side any legislative victories. The GOP's strategy now will be to show
that the Dems can't get anything done, so they block, filibuster, and
veto. They are the opposition in the House, so their job is to oppose.

The Dems will use their chairmanships and control of the House floor
to schedule partisan hearings and votes to try and make the Republicans
look bad any way that they can. The most important thing for Nancy
Pelosi will be to hold onto the majority and line up some divisive
issues to hammer on to help the party's 2008 presidential nominee. Note
that she won't be scheduling votes on tax hikes anytime soon, because
that would immediately revive the GOP and jeopardize 2008.

I do think the two parties are going to have to figure out how to get some judgeships filled, but I am not holding my breath. My real wish is that Pelosi would pursue impeachment, not because I think it is justified but because it would tie Congress up into a magnificently entertaining gridlock. Unfortunately, she has pledged she would not do so.